In re Palmdale Hills Property, LLC
| Decision Date | 15 December 2009 |
| Docket Number | Bankruptcy No. SA 08-17206-ES.,BAP No. CC-09-1101-HPaMk.,BAP No. CC-09-1103-HPaMk.,BAP No. CC-09-1106-HPaMk.,BAP No. CC-09-1105-HPaMk.,BAP No. CC-09-1102-HPaMk.,BAP No. CC-09-1107-HPaMk.,BAP No. CC-09-1100-HPaMk.,BAP No. CC-09-1104-HPaMk. |
| Citation | 423 B.R. 655 |
| Parties | In re PALMDALE HILLS PROPERTY, LLC, Debtor. Lehman Commercial Paper, Inc., Appellant, v. Palmdale Hills Property, LLC, et al., Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Christopher Pace, Weil Gotshal & Manges, LLP, Miami, FL, Attorney for Lehman Commercial Paper, Inc.
Paul John Couchet, Winthrop Couchet Professional Corp., Newport Beach, CA, Attorney for Palmdale Hills Property, LLC.
Before: HOLLOWELL, PAPPAS and MARKELL, Bankruptcy Judges.
The issue presented in this appeal is whether a debtor violates the automatic stay of its creditor's bankruptcy case when it proposes to equitably subordinate the creditor's claim and transfer the lien securing the claim under § 510(c).1 Because, in this case, equitable subordination would modify the creditor's property interest, we find it violates the creditor's automatic stay. Accordingly, we REVERSE those provisions of the bankruptcy court's orders on appeal that find otherwise.
Lehman Commercial Paper Inc. ("Lehman Commercial") is a debtor in a chapter 11 bankruptcy case in the Southern District of New York. Palmdale Hills Property, LLC ("Palmdale") filed a chapter 11 bankruptcy petition on November 6, 2008, in the Central District of California. The case is being jointly administered with seventeen of Palmdale's related entities ("Debtors").2 Debtors are part of an integrated network of companies that operate as the Sun Cal Companies, or SunCal, and were formed as part of a joint venture to develop twenty-one residential real estate projects with affiliates of Lehman Brothers, Inc.
Lehman Brothers and its affiliates, including Lehman ALI, Inc. (ALI)3 and Lehman Commercial, provided over $2.3 billion in financing for the projects through a series of loan agreements and equity arrangements on Debtors' projects. Among other things, Debtors allege that the structure of these financing arrangements constituted manipulative lending practices and fraudulent conveyances. Debtors contend that the complete control of Lehman Brothers, as well as ALI and Lehman Commercial, over the use of the funds in the loan facility created Debtors' debt burdens and ultimately forced Debtors to file for bankruptcy protection.
On November 10, 2008, soon after filing bankruptcy, Debtors sought blanket relief from the automatic stay in Lehman Commercial's bankruptcy case in the Southern District of New York "to allow the Debtors to generally administer their California Chapter 11 cases in order to avoid the need for having to file repeated relief from stay motions in New York." The bankruptcy court in New York denied the broad relief, but did so without prejudice so that Debtors could refile specific stay relief requests as needed.
Debtors' proposed joint chapter 11 plan of reorganization is based on their attempt to equitably subordinate the claims of ALI and Lehman Commercial ("Lehman Lenders"). On January 6, 2009, Debtors commenced an adversary proceeding against ALI to equitably subordinate its claim. Debtors amended the equitable subordination complaint to include Lehman Commercial as a defendant and proposed to file the amended complaint if the California bankruptcy court determined the complaint would not violate Lehman Commercial's automatic stay.
On January 29, 2009, the Lehman Lenders filed motions for relief from stay in Debtors' bankruptcy case asserting they were owed approximately $649 million in principal, plus interest, on various Lehman Lenders' loans.4 The loans consisted, in part, of three credit agreements between Lehman Commercial and Debtors including: an agreement executed in November 2005, by SunCal I, which provided for a loan in the amount of $75 million (which increased to $395 million over time and was later reduced to $277 million), secured by a first lien on all the real and personal property owned by Bickford, Acton and Emerald Meadows, as well as a pledge of equity interests held by SunCal I and Summit; a February 2007, agreement with Palmdale for a $264 million loan secured by Palmdale's real property and equity interests; and a March 2007, agreement executed by SCC/Palmdale for a $95 million loan, secured by SCC/Palmdale's property and equity interest in Palmdale. ALI holds a promissory note executed by Bickford in May 2005, in the amount of $30 million secured by a second lien on Bickford's real and personal property.
The Lehman Lenders argued the properties securing the loans lacked equity and were declining in value ("Stay Relief Motion"). The Lehman Lenders also argued that Debtors' reorganization could not succeed since it was premised in part on subordinating Lehman Commercial's claim, which Lehman Commercial argued violated its stay.
Debtors filed an omnibus opposition to the motion on February 6, 2009 ("Opposition"). Debtors contended they had equity in the properties based on the argument that the Lehman Lenders' claims could be equitably subordinated and the liens transferred to the estate.
On February 20, 2009, the bankruptcy court issued a tentative ruling on the Stay Relief Motion, finding that:
the existence of the [equitable subordination] claims can be asserted as a defense to the motion for relief from stay. . . . Given movant's assertion of secured claims against Debtors in these bankruptcy estates, Debtors are entitled to assert appropriate defenses to such claims and may do so without violating the automatic stay of the movant.
The parties addressed the tentative ruling during the hearing that same day. At the close of hearing, the bankruptcy court stated the tentative ruling would stand, finding there was not sufficient cause to grant stay relief and that Debtors could pursue equitable subordination, either through an adversary proceeding or through a plan or reorganization, as a defense to Lehman Commercial's Stay Relief Motion, which the court treated as an informal proof of claim. The final orders denying stay relief were entered March 10, 2009 ("Denial Orders"). The Denial Orders held that:
(a) The [Stay Relief] Motion sufficiently states an express demand referencing the nature and amount of the claim, and therefore Movant's Motion constitutes an informal proof of claim.
(b) This Court has concurrent jurisdiction to determine the scope and applicability of the automatic stay under 11 U.S.C. § 362(a) and/or (b), arising from the Chapter 11 bankruptcy proceeding of Lehman Commercial Paper Inc. ("Lehman Commercial") as it applies to matters before this Bankruptcy Court.
(c) The automatic stay arising from the bankruptcy case of Lehman Commercial does not apply to any objection to the claim of Lehman Commercial, any proceeding to subordinate the claim of Lehman Commercial pursuant to 11 U.S.C. § 510(c)(1), and/or the transfer of a lien securing a subordinated claim to the estate pursuant to 11 U.S.C. § 510(c)(2), in this Chapter 11 proceeding.
(d) The Debtors may object to the claim of Lehman Commercial, seek to subordinate the claim of Lehman Commercial pursuant to 11 U.S.C. § 510(c)(1), and/or seek to transfer a lien securing a subordinated claim to the estate pursuant to 11 U.S.C. § 510(c)(2), via an adversary proceeding or plan, without violating Lehman Commercial's automatic stay.
Lehman Commercial timely appealed the Denial Orders. Lehman Commercial does not contend the bankruptcy court abused its discretion in denying the Stay Relief Motion, but assigns error to the bankruptcy court's determination regarding the scope and application of Lehman Commercial's automatic stay.
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 157(b)(1) and (2)(G) and (O). We have jurisdiction under 28 U.S.C. § 158.5
On September 23, 2009, Debtors filed an emergency motion to continue for sixty days the oral argument, which was scheduled on September 25, 2009. The Panel denied the request the same day. Oral argument was held on September 25, 2009.
After oral argument, on October 20, 2009, Debtors filed a motion to dismiss the appeal for lack of jurisdiction as a result of decisions made in the bankruptcy court regarding the ownership of Lehman Commercial's loans ("October Order"). Specifically, the bankruptcy court determined that certain Lehman Commercial loans were sold, not simply transferred to a third party, Fenway Capital ("Fenway Capital Loans"), for security. Thus, in the October Order, the bankruptcy court ruled that Lehman Commercial was not the creditor with respect to the Fenway Capital Loans. The bankruptcy court reserved ruling on whether Lehman Commercial could file proofs of claim as an agent for Fenway Capital.
Debtors argue that Lehman Commercial does not own any interest in the Fenway Capital Loans, and therefore, the automatic stay could not bar subordination of such loans. As a result, Debtors argue the appeals are moot and that Lehman Commercial lacks standing. Lehman Commercial contends that a portion of at least one of the loans was not part of any sale or transfer to Fenway Capital.
An appeal is moot if events have occurred that "prevent an appellate court from granting effective relief." Varela v. Dynamic Brokers, Inc. (In re Dynamic Brokers, Inc.), 293 B.R. 489, 493-94 (9th Cir. BAP 2003) citing First Fed. Bank v. Weinstein (In re Weinstein), 227 B.R. 284, 289 (9th Cir. BAP 1998).
However, we find that effective relief could be granted to Lehman Commercial, since it is not clear that all the loans Lehman Commercial made to the Debtors were the subject of the October Order. Moreover, Lehman Commercial...
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